2018/media/Files/R/Rolls-Royce/...£518m net R&D cash spend in H1 2018 Increased investment in Civil...

2018 Half Year Results © Rolls-Royce

2018 Half Year Results


2 August 2018


Jennifer Ramsey Head of Investor Relations


Agenda for today

3

Jennifer Ramsey Introductions

Highlights Warren East

Financial Review Stephen Daintith

Business outlook Warren East


Notices

Safety Safe Harbour

Mobile Phones


Warren East Chief Executive

Highlights


6

Results summary

Underlying core revenue Underlying core gross profit

Underlying core PBT Underlying core operating margin

Core free cash flow ‘Dividend’ per share

£6.7bn 16 %* £870m 12 %*

£81m £182m* 2.2% 300bps*

£10m H1 2017: £(264)m 4.6p H1 2017: 4 . 6 p

* Organic change

p

“Good progress in a breakthrough year”

Full Year 2018 now expected to be in the upper half of our guidance range


7

2018 Half Year overview

Civil Aerospace

Large engine production up; installed fleet growth; OE loss reduced; new engines launched; continued to manage in-service engine issues

Power Systems

Continued strong growth across almost all end markets

Defence

Strong cash performance with healthy H2 pipeline

Restructuring

Focused on removing duplication and complexity

Financial

Increased confidence in 2018 full year; in-service engine issue costs up; exceptional charge


8

Trent 1000 update

Expected cash cost profile*

Trent 1000 P&L treatment

Unacceptable level of customer disruption

Closely working with affected airlines

2018 around £450m

2019 around £450m

Reducing by £100m in 2020

Falling significantly beyond 2020

£554m exceptional charge for “abnormal” costs

“Normal” costs taken through margin over contract length

Operational update

Peak Aircraft on Ground (AOG) passed

Significantly increased MRO capacity

Fixes expedited * Trent 1000 and Trent 900 combined cash cost


9

Structure to enable change

“Creating the conditions for the businesses to solve the problems themselves”

Much smaller light-weight Head Office

Following ITP Aero acquisition in December 2017, it will operate and report as a separate business unit

Civil Aerospace

Power Systems

Defence

Significantly reduced central costs

Empowered businesses, more control of own costs

Shared vision and clear accountability

Each business to deliver improving returns


10

Restructuring progress

Established Group Business Services, to bring together 2,000 employees as a multi-function service delivery organisation

Established an Innovation Hub to create genuine competitive advantage

Executive team face-to-face discussions with thousands of employees to help set priorities and identify key opportunities

Target run-rate savings of £400m per annum by end 2020


11

Progress in Civil

“Our strong position on new widebody aircraft is underpinning substantial growth”

Aero engines for the large commercial aircraft, regional jet and business aviation markets

Growth Trent 7000 Ramp up

Pearl 15 New technology

24% growth in large engine deliveries; progress on OE losses

A330neo received EASA certification

20% growth in large engine invoiced flying hours

First of a new family of business jet engines

Ultrafan® core demonstrator now running at full power in test


12

Progress in Power Systems

“Encouraging momentum”`

Provides high-speed and medium-speed reciprocating engines, propulsion systems, distributed energy solutions and Civil Nuclear

Markets Simplify Gas Power

Service R&D

Recovery in commodity markets has driven strong volume growth

>30% reduction in product variants

Demand driven by gas availability and fast response capability

Roadmap implementation for Power Systems 2030

Focus on efficient and disciplined development investment


13

Progress in Defence

“Positioned well for a solid year of operating performance”

One Defence business with market-leading Defence aerospace, Naval and Submarines operations

Structure MT30 F-35B

Pipeline Team Tempest Full year orders

supported by strong pipeline in Combat, Naval and Submarines

Maintained its position as core naval engine platform of choice

Business solutions now possible to better serve our customers

Lightning II aircraft – first deployment to the UK

Progress to secure role to develop UK’s future Combat Air Strategy


14

Portfolio restructure

“These transactions build on the actions we have taken over the last two years to simplify our business”

L’Orange sale completed

Commercial Marine sale announced

L’Orange supplies fuel injection technology

Sale agreed at enterprise value of €673m

Purchased by Woodward Inc, USA

Completed 1 June 2018

Sale includes propulsion, deck machinery, automation & control, a service network, ship design capability & Ship Intelligence

Sale agreed at enterprise value of £500m

Purchased by KONGSBERG, Norway

Trading agreement with Bergen, part of Power Systems

Completion expected Q1 2019


Stephen Daintith Chief Financial Officer

Financial Review


Agenda for today

16

01 Half year results

02 Business unit review

03 Accounting policy updates

04 Guidance


17

Half year results



18

£m

Civil Aerospace X

Defence X

Power Systems X

ITP Aero X

Corporate/eliminations X

Core business X

Commercial Marine X

L’Orange X

Other X

Non-core business

Group underlying result X

Core & Non-core business reporting format

Internal & external reporting updated to reflect M&A

This section will focus on the Core business of Rolls-Royce: Civil Aerospace, Power Systems, Defence and ITP Aero Commentary is provided on an underlying basis, at constant currency and excluding M&A

Non-core business Commercial Marine

L’Orange

Plus

Other smaller entities

Core business Key focus of Group operations


19

£m

Underlying Revenue

Organic change

Underlying op. profit

Organic change

Civil Aerospace 3,600 +26% (112) 149

Defence 1,415 - 162 (6)

Power Systems 1,471 +13% 80 52

ITP Aero* 375 +19% 40 32

Corporate/eliminations (181) - (24) -

Core business 6,680 +16% 146 183

Non-core business** 360 -15% (5) 12

Group underlying result 7,040 +14% 141 205

Group Underlying results

*ITP Aero operates and reports as a separate business unit

**Non-core business reported as discontinued operations and assets held for sale

Group free cash flow +£267m reported & +£211m organic to £(72m)

Strong revenue growth

Significant operating profit and FCF improvement


20

Core Business Underlying results

£m H1 2018 H1 2017 Change Organic change

Core underlying revenue 6,680 5,611 +19% +16%

Core underlying gross profit 870 712 +22% +12%

Gross margin % 13.0% 12.7% +30bps -50bps

Research and development costs (296) (396) -25% -28%

C&A (479) (436) +10% +4%

Joint ventures & associates 51 50 +2% +8%

Core underlying operating profit 146 (70) 216 183

Underlying operating margin 2.2% (1.2)% +340bps +300bps

Core free cash flow 10 (264) 274 214

“Strong first half progress in core profit and free cash flow”


21

Continued underlying growth in Core OE & LTSA revenue


OE revenue 3,247 2,594 +25% +19%

LTSA service revenue 1,659 1,455 +14% +13%

Other service revenue 1,774 1,562 +14% +15%

Core underlying revenue 6,680 5,611 +19% +16%

Gross margin (%) 13.0% 12.7% +30bps -50bps

13%

26%

25%

49% 15%

19%

OE

LTSA

Other service

Good visibility of revenues

Strong growth in other service revenue led by Civil Aerospace T&M


22

Core business R&D

£m H1 2018 H1 2017 Organic Change

Gross R&D 663 620 +4%

Third party contributions (145) (181) -20%

Net R&D cash spend 518 439 +14%

Capitalised (239) (84) +177%

Amortisation 17 41 -64%

Core R&D P&L charge 296 396 -28%

£518m net R&D cash spend in H1 2018

Increased investment in Civil Aerospace:

– Advance development programmes

– Ultrafan® progress continues

– New business aviation family (Pearl 15)

Increase spend in Defence on future programme investment

H1 2017 H1 2018

£439m £518m

ITP

Power Systems

Defence

Civil

Net R&D cash spend up £79m

Capitalisation policy application change absent from H1 2017

P&L charge £100m lower vs H1 2017

Full Year expectations unchanged


23

Restructuring Good start

Costs Total Costs – £500m cash

costs to implement

− Redundancy costs

− Cost of enabling systems

Treatment – Underlying profit & FCF excludes one-offs of restructuring

Benefits Savings – £400m net saving

run rate by end of 2020

Reduced fixed costs & headcount

Simpler, more responsive business structure

Improved efficiency and effectiveness

H1 Exceptional P&L charge of £132m for restructuring

Good start on delivering plan

Targets delivery of net £400m reduction in costs by end 2020

Savings focused on C&A & Engineering spend


24

Trent 1000/900 cost update Financial impact

2017

£170m

7 March 2018 Guidance

Pack C & B

Better AoG, MRO response

15 June 2018 Guidance

Trent 1000 / 900 in-service cash costs

Mitigations offset incremental ~£100m cost in FY18

Still expect Group FCF growth in 2019

2019

2020

c.£450m

Beyond

2020

Material reduction

Updated impact reflects:

Compressor rotor blade costs

Significant ongoing customer disruption

c.£350m

c.£450m

“broadly double”

“~£100m incrementally

Higher”

“broadly flat”

“Reduce by at least £100m”

c.£350m


25

A series of abnormal events, giving rise to a significant level of cost, of a nature not normally expected, which is not reflected in contract price

For example:

– When we suffer material technical issues arising from regulatory airworthiness directives

– With a wide ranging impact across the fleet of an entire product type

– Causing significant disruption to customers

In these cases then cost of disruption, wasted material, labour etc will be treated as exceptional in the P&L

Trent 1000 exceptional charge

Triggers for exceptional treatment


26

Trent 1000 £554m H1 exceptional charge covers abnormal costs which fall outside the scope of our normal TotalCare costs

Represents c.40% of total costs of resolving Trent 1000 issues for the period to 2022 - Not incremental to the cash costs

The remainder of these costs will be recognised over time in the P&L through our normal contract accounting margins

Cash costs will continue to be fully reflected in underlying free cash flow

Trent 1000 exceptional charge

Income statement impact


27

Drivers of cash flow

Group Trading cash flow

Of which: Core Trading Cash flow

Increased cash inflows from Civil aftermarket and EFHs

Higher spare engine volumes – Better H1:H2 balance

Defence & other business WC improvements

Mitigation actions (discretionary spend, capex)

Trent 900/1000 engine in-service costs

Power Systems modestly lower due to order book composition

Higher future programme R&D investment (Civil / Defence)

Higher tax

Pension reduction in contributions reflecting UK plan surplus

£230m increase to £(26)m

£241m increase to £45m

Group Free cash flow

Of which: Core Free Cash flow

£267m increase to £(72)m

£274m increase to £10m

Drivers of reported £267m Group FCF improvement vs. prior year

+

-

-

+ -

+

-

+ Significantly ahead of prior year led by Civil & Defence

Reduced benefit from working capital vs. PY.

Increased confidence around FY18 cash flow

+


28

Group Net working capital change

Overall H1 2018 working capital cashflow benefit of £129m (H1 2017: £324m)

Increase in inventories £(427)m

Main drivers in H1 2018 (£129m benefit vs £324m in H1 2017)

+

Increase in trade and other receivables £(300)m

- Volume growth in both Civil Aerospace & Power Systems

Phasing of product deliveries in Defence

+

-

Increase in trade and other payables £997m

+ Material increase in Civil LTSA creditor balances: EFH growth in advance of revenues recognised; £154m prior year contract catch up adjustment

Phasing ahead of H2 volume ramp up at Power Systems

Underlying volume growth at Civil Aerospace

+

Increase in risk and revenue sharing partner related debtor balances in Civil Aerospace

Power Systems decrease due to timing of sales -


29

Group balance sheet: Ambition to return to a single A rating

Completed disposal of L’Orange; net proceeds of €673m (£584m) received

Announced sale of Commercial Marine; EV of £500m. Expected net proceeds of ~£350m to £400m

Successfully issued €1.1bn (£968m) of bonds at attractive rates to pre-fund all existing debt maturities until end of 2019

Net cash H1 2018

Strong liquidity position

£6.9bn

£165m

*Reported net debt includes ITP Aero’s £215m net cash

FY 2017 net debt of £(305)m* improved to H1 2018 net cash position of £165m


30

Shareholder payments

Committed to restoring shareholder payments to an appropriate level over time; FCF key driver of growth

Aspire to mid-term 2.5x FCF / dividend cover through cycle

View in the context of overall capital allocation

2018 Interim payment maintained; 4.6p per share

Expected cash cost £86m


31

Business Unit review 02



32

Underlying revenue - strong OE and T&M services growth; negative contract catch-ups suppressing LTSA growth

Gross profit - service activity growth & higher spare part sales; offset by £154m negative contract catch-up (£64m higher)

Operating loss - £174m net R&D capitalisation increase driving significantly lower R&D charge; C&A broadly flat

Civil Aerospace Overview

Strong growth in revenue. Operating loss reduced by £149m on an organic basis


OE revenue 1,530 1,151 +33% +32%

Services – LTSA 1,328 1,190 +12% +12%

Services - T&M/other* 742 517 +44% +43%

Underlying revenue 3,600 2,858 +26% +26%

Gross profit 148 137 +8% +12%

Gross margin % 4.1% 4.8% -70bps -50bps

Operating profit (112) (250) 138 149

Operating margin % -3.1% -8.7% +560bps +590bps

69%

14%

13% 4%

Revenue by type

Large engines 36%

Business 10%

Regional 14% V2500

5%

*Other includes contract payment from IAE based on V2500 flying hours


33

209

259

Widebody deliveries

Installed OE engine deliveries:

Trent XWB and Trent 1000 growth

Trent 700, A330ceo production slowing down

Increased spare engines: more balanced H1/H2 delivery profile

+7 Business aviation engines: driven by improving market

+24%

H1 2017 H1 2018

45%

16%

28%

11%

Over 2,400 WB engines on order

Engine deliveries

In service

On order

Trent 700 1,614 61

Trent 7000 0 458

Trent XWB 358 1,379

Trent 900 364 187

Trent 1000 490 331

+

-

Trent XWB

Trent 700

Trent 1000

Trent 900

Widebody engine production ramp continuing


34

1

Good progress on widebody OE unit loss reduction

Continue to work towards break-even target on Trent XWB-84 by 2020

Civil Aerospace: key cash drivers

OE loss

Ongoing drive for OE cost reductions across the portfolio

15% Average OE loss 15% lower than FY 2017

Trent 900

Trent XWB-84

increase / decrease %

Trent 700

H1 2018 deficit

XWB-84: cost & price reductions

Trent 900: 2017 temporary pricing impact

Trent 700: end-of-life pricing headwind

Increase in volume of newer, higher loss-making engines in H2

Trent 1000


35


5.8m

6.9m

H1 2017 H1 2018

+20%

4,409 4,567

FY 2017 H1 2018

+4%

Large engine invoiced EFH Large engine in-service fleet

Continued growth of Trent 700, Trent 1000 and Trent XWB fleets

Growth in Trent 1000 and Trent XWB fleets

Good performance in mature engine transitions

Strong Widebody EFH growth

Modest increase in Business Aviation EFH

Expected aircraft retirements driving lower regional EFH

2 EFH growth


36

3

Growing fleet driving increased shop visits


Widebody LTSA major shop visits

Widebody LTSA check & repair visits

Increase in Trent 700 engine first overhauls

Accelerated maintenance activity on Trent 1000/900

Shop visits

91

137

H1 2017 H1 2018

+46

158

242

H1 2017 H1 2018

+84


37

Trent XWB

Excellent entry into service

Total cumulative fleet hours

>2m

Engine performance in-service in line with expectations

Trent XWB-84

Solid progress on engine cash deficit reduction

Dispatch reliability in first half

99.9% Trent XWB-97 entered into service in February

% deficit reduction

2020 2015

Engine unit cost

Price (net of RRSP share)

Target

352 in service

19 operators


38

Underlying revenue - double-digit growth in both OE and Services

Gross Margin - 180bps improvement reflects higher volumes

Operating margin - improvement of 330bps

Power Systems 0verview


OE 945 814 +16% +14%

Services 526 461 +14% +12%

Underlying revenue 1,471 1,275 +15% +13%

Gross profit 354 283 +25% +23%

Gross margin % 24.1% 22.2% +190bps +180bps

Operating profit 80 26 54 52

Operating margin % 5.4% 2.0% +340bps +330bps

H1 performance driven by strong OE volumes and services growth with strength across end-markets


39

64%

36%

29%

30% 27%

8%

6%

Power Systems 0verview

By end market

By type

H1 OE revenue growth of 14% led by strong end markets Volume driven; strength across almost all markets; PowerGen down due to tough PY comparison base

H1 services revenues +12% Strong growth in commodity exposed markets

Good order intake; +27% versus prior year Pre-buy effect in Construction & Agriculture markets, strength in commodity related end markets and PowerGen wins

On track to deliver FY18 FY order coverage over 80%; significantly better than prior year

OE 14%

Services 12%

Marine 40%

Industrial 31%

PowerGen 15%

Defence/Other 17%

Civil Nuclear 1%

On track; confident over outlook for 2018

Underlying revenue

£1,471million

2.5 2.5

2.8 Order book £bn

H1 2017 FY 2017 H1 2018


40

Defence Overview


OE (& Development) 608 629 -3% +1%

AM - LTSA 250 227 +10% +16%

AM - T&M 557 622 -10% -7%

Underlying revenue 1,415 1,478 -4% -

Gross profit 281 292 -4% +1%


Operating profit 162 180 (18) (6)

Operating margin % 11.4% 12.2% -80bps -40bps

Solid performance; margins impacted by higher R&D spend on future technology

Underlying revenue - broadly flat

Gross Margin - stable versus prior year

Operating margin - down 40bps; higher R&D spend partly offset by reduced C&A


41

43%

18%

39%

37%

19%

22%

8%

14%

Solid OE revenue Transport and Submarines growth offset lower Combat volumes

Services revenue flat Increased LTSA and Combat spares offset Submarines (shift in contract phase)

Orders weighted to H2 Good pipeline in Combat, Naval & Submarines

Remain confident on FY18 outlook Expect similar H2 weighting to profit as 2017 (60:40)

OE & Development 1%

T&M & Other

7%

Transport 8%

Combat 10%

Submarines 1%

Naval 6%

Other 2%

Defence Overview

Confidence in the outlook for remainder of the year

LTSA 16%

By type

Underlying revenue

£1,415million

By end market


42

Outlook positive despite near-term cash investment cycle

ITP Aero Overview*


Underlying revenue 375 309 +21% +19%

Gross profit 85 50 +70% +67%


Operating profit 40 8 32 32

Operating margin % 10.7% 2.6% +810bps +820bps

Underlying revenue driven by the growth in Civil Aerospace programme deliveries in ITP Aero’s portfolio +21%

Gross margin - significant improvement; higher aftermarket volumes, improved OE mix

Operating margin - driven by gross margin improvements in Civil

*ITP Aero was acquired on 19 December 2017. Prior year comparatives are unaudited and are presented for comparison purposes only


43

Accounting policy update 03



44

Accounting policy updates

Amendments to accounting for financial instruments

Effective from 1 January 2018 with adjustment to reserves on that date

No restatement of comparatives

No change to hedge accounting for foreign exchange

No material effect on the H1 2018 numbers

IFRS 9 Financial Instruments

All leases on balance sheet

Effective from 1 January 2019 with adjustment to reserves on that date

No restatement of comparatives

Continue to make good progress on policies, impact assessment and system implementation.

Property and aircraft engines most material

IFRS 16 Leases


45

Guidance 04



46

2018 Cash Outlook

Free cash flow (FCF) guidance updated Prior FCF guidance for Group (excl. ITP Aero) as provided at FY17 Results

£(100)m £100m

£450m

£350m £550m

£450m

£550m

£400m

£100m

£100m

£300m £500m

Updated FCF guidance on a like-for-like basis

Adjusted for:

• £(50)m Inclusion of ITP Aero

• Removal of Commercial Marine & L’Orange (Net £nil)

Now expected to be in the upper half of our guidance range

Now expected to be in the upper half of our guidance range:

• Improved Defence margin

• Better Power Systems growth

Core business FCF (incl. ITP Aero) guidance

£350m

Cash flow guidance now expected to be in the upper half of our guidance range

£(100)m £(100)m

£(100)m £(100)m


47

2018 Profit Outlook

Profit guidance updated Prior profit guidance for Group (excl. ITP Aero) as provided at FY17 Results

Profit guidance on a like-for-like basis

Core business operating profit (incl. ITP Aero) guidance

£(100)m £100m

£400m

£300m £500m

£400m

£500m

£100m

£450m £(100)m £100m

£350m £550m

£(100)m

£300m

Profit guidance now expected to be in the upper half of our guidance range

£(100)m

Adjusted for:

• +£50m Inclusion of ITP Aero

• Removal of Commercial Marine & L’Orange (Net £nil)

Now expected to be in the upper half of our guidance range

Now expected to be in the upper half of our guidance range:

• Improved Defence margin

• Better Power Systems growth


Warren East Chief Executive

Business outlook


Customers

Technology

Resilience Financial Progress

Service revitalisation

Development of new engine architecture

EVTOL concept personal flight

Cultural change

Improving adaptability

Diversity & inclusion

High ethical standards

Improving free cash flow

Strengthened balance sheet

Disciplined capital allocation

Large engine production ramp-up

Expanding service network

Mitigating disruption from in-service issues

Priorities for 2018 remain unchanged


50

Restructuring

Drive out unnecessary costs 01

Remove complex & duplicative processes

Create ownership behaviour

Develop a real performance culture

Must do:

02

03

04


51

Build balanced portfolio

Develop: Our long-term vision and strategy

Pioneering the Power that Matters

Rolls-Royce pioneers cutting edge technologies that deliver the cleanest, safest and most competitive solutions to meet our planet’s vital power needs

Vitalise existing capabilities

Transform our Business

Reinvent with digital Champion electrification

Build balanced portfolio

Champion electrification

Transform our Business

Vitalise existing capabilities

Reinvent with digital

“Creating the leading Industrial Technology Company”


Q&A



53

This announcement contains certain forward-looking statements. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. In particular, all statements that express forecasts, expectations and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the availability of financing to the Company, anticipated cost savings or synergies and the completion of the Company's strategic transactions, are forward-looking statements. By their nature, these statements and forecasts involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. The forward-looking statements reflect the knowledge and information available at the date of preparation of this announcement, and will not be updated during the year. Nothing in this announcement should be construed as a profit forecast. All figures are on an underlying basis unless otherwise stated - see note 2 of the 2018 Half Year Results Statement for the definition.

Safe harbour statement

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